Throughout the history of financial markets there have been periods when certain types of investments became all the rage. Because of any number of circumstances, these assets became viewed as “sure things,” and investors began to jump on the bandwagon, throwing more and more money at investments that rose steadily for a while, but eventually receded in value as economic realities re-asserted themselves.
In my career, I’ve seen this occur several times. For example, I clearly recall the “Dot-Com Bubble” of the late 1990s, when all a company seemingly needed to do to obtain massive investor financing was to add the suffix “.com” to its name. Eventually, as company valuations ballooned far beyond reasonable earnings expectations, stock prices began to erode, helping to usher in the bear market of the early 2000s. But the phenomenon goes way back in history. In the Roaring Twenties in the United States, expanding use of debt by both consumers and corporations helped fuel a booming bull market, led by investment flooding into “new technology”: automobiles, radios, aircraft, and motion pictures. On October 24, 1929—“Black Thursday”—it all started to unwind, a factor in the ensuing Great Depression of the 1930s.
What all of these events have in common is their human fuel: fear of missing out, or “FOMO.” When we see those around us enjoying unheard-of gains, we want in on the action, too. Our human tendency is to join the “winners” at all costs; this behavioral trait, often amplified by the “herd instinct,” can easily lead to phenomena like the investment panics described above.
Today, tremendous attention is being focused on a handful of companies, often called “The Magnificent Seven”: Alphabet (parent of Google), Amazon, Apple, Meta (parent of Facebook and Instagram), Microsoft, chipmaker Nvidia, and Tesla. Much of the excitement around these companies is generated by their common focus on developing and utilizing AI technology, which is seen as a “new frontier” by many. The stock prices of these companies have risen strongly over the past several months, advancing at an aggregate rate of nearly 76% in 2023 alone. Taking this situation on its face, why wouldn’t any investor want to go “all in” on the Magnificent Seven? Why would anyone want to miss out on an opportunity like this?
While it is probably inaccurate to compare the price performance of these stocks to the “bubbles” mentioned above, it might be helpful for investors being tempted by FOMO to view the situation a little differently. Are returns like these something that investors should expect? Or are they more likely to be one-off performances that could be more difficult to replicate over time? More importantly, is it worth risking your financial future by overweighting your own portfolio with high-risk investments? In our business, we often hear the phrase, “This time it is different,” meaning, “This new trend is not like the last one, and it won’t fall apart.” Unfortunately, this often proves not to be the case.
There are two ways you can think about mitigating FOMO when it arises. First, consider whether overweighting these positions is really right for your overall financial situation in light of your goals. Thinking about your overall situation in this way requires an understanding of the risk and anticipated investment return associated with your portfolio in the context of reaching your overall financial objectives.
Next, add some additional comparisons into the mix. Think about who is investing in these companies; are they really getting rich? With social media these days, we tend to only see the winners (good or positive situations), which may make us feel like we are not as good as everyone else. But if we expand our pool of comparison to realize that there are other great investors—like the late John Bogle, who founded Vanguard—then consider the amount of money companies like Vanguard or Dimensional Fund Advisors are managing, it may help us understand that not everyone out there is getting rich off the few positions that everybody seems to be talking about. You should also remember that it is likely that these positions are already in your holdings—and many other investors’—in smaller, more appropriate amounts, as part of a disciplined strategy.
While there may be a place in the portfolio for stocks exhibiting dramatic returns like these, we believe the more prudent option for most investors is to focus on expected returns, rather than counting on the unexpected repeating itself. In other words, it isn’t a good idea, in most cases, to allow FOMO to influence portfolio composition. And, as a matter of fact, many well-diversified portfolios may already have exposure to these outperforming stocks by holding them in an exchange-traded fund (ETF) or mutual fund. This would allow participation in the current upside without putting the investor in the position of holding a concentrated position that may not align with the investor’s risk profile. Rather, by planning for expected returns in line with historic averages (recognizing always that past performance is no guarantee of future results), combined with solid diversification and asset allocation in line with the investor’s tolerance for risk, we believe that most investors will be able to track solid progress toward their most important financial goals. Rather than trying to guess which stocks will be next year’s “Magnificent Seven,” we believe it is more reliable to build on a foundation of reasonable expectations and commitment to a long-term strategy.
Is FOMO creeping into your financial planning thoughts? We’re here to help. To learn more, why not check out our recent article, “The Magnificent Seven: Great Movie, but as an Investment?”
